Borrowing to finance budget deficits isn’t a bad idea provided it is not applied for recurrent consumption. The importance of government spending in stimulating production and consumption activities came to the highest point of recognition in the global economy during the last financial crisis.
Governments and central banks around the world wove vast stimulatory spending safety nets around their economies to keep productive engines firing, retain men at duty posts and sustain consumer spending power. The then US Federal Reserve chairman, Ben Bernanke-led stimulatory spending programme provided the counter cyclical economic force that broke the tide of the financial crisis.
The ability of government to undertake stimulatory spending depends on the fiscal space at its disposition. It can either draw down from past savings or borrow in the absence of sufficient savings to meet the current expenditure needs.
Nigeria failed to build up adequate reserve even during the longest running upside of the oil market cycle and this happened to both federal and state governments. The only option the federal and state governments have now in order to sustain the level of economic activity or extent it is to seek new borrowings.
The federal government has since been seeking foreign loan facilities to finance a large deficit in its N6.0 trillion budget for 2016. State governments are also moving in the same direction of raising new loans to meet the spending targets in their 2016 budgets.
Caution is however required as some states already have huge debt profiles to the extent that the federal government recently directed banks not to grant them fresh loans without clearance from the ministry of finance.
The President has just jetted out to China for a $2 billion needed to finance his N3 trillion deficit in the budget. The Enugu State House of Assembly, last week, approved a N30 billion loan the state government needs to facilitate ongoing developmental projects across in the state. Some states started borrowing under one month in office and the problem is that many of them are borrowing to pay salaries.
The borrowing has been necessitated by the drastic shortfall in oil revenue and consequently a drop in the federal allocations. It is an option however that needs careful planning and conservative management. If not it could leave the government in a worse fiscal state when interest payments become a burden on earnings in the future.
Borrowing therefore may or may not be good for government depending on what the funds are applied for. Borrowing is good for business and for government provided they don’t borrow to consume or let it be wasted or looted.
A state like Enugu that is in the fore front of massive infrastructure development is quite likely to get on well with the new borrowing. The new capacity building projects in the state are already ongoing and good results have been achieved already.
This assures that the loan will be used for capital spending to the benefit of all rather than for recurrent consumption by the few in the civil service. Nigeria needs to increase development spending per head, which Enugu State is set to achieve with what it is doing so far.
Borrowing makes sense only if it is applied for a productive purpose. In the case of a government, it has to ensure that additional economic capacity is created in the economy to create wealth and opportunities from which the loan would be repaid without strain on future earnings.
The loan that the federal government is seeking is also said to be for infrastructure projects, as the federal budget has virtually no internally generated revenue for capital spending. That has been the structure of government finances for many years now anyway, as huge recurrent expenditure has progressively crowded out capital spending.
Government isn’t doing anything fundamental so far to change the spending structure in which more than 75% of government revenue goes into recurrent expenditure. This is itself a threat to the right application of the fresh loans it is presently seeking. In the event of further revenue disappointments along the line, resources meant for capital spending, including the borrowed funds might find their way to meet the more expedient recurrent spending.
A fundamental restructuring of government administrative machinery at the federal and state levels have become imperative for the governments to be in a position to rightly apply debt capital for economic development. Also imperative is the creation of a new level of operating efficiency in government finances to close loopholes for budget padding and misapplication of funds.
Nigeria’s economy runs on a faulty system in which huge funds can be diverted without a red alert raised anywhere along the line. For the amount of funds that people are being prosecuted for presently to have left the public treasury without an alarm triggered anywhere in the system, we really have a problem.
I am afraid that the new loans the President is presently combing the globe for could end up in private accounts, putting the nation in a bigger debt burden without stimulating the productive capacity that was intended.
I am impressed that the government of Enugu State is moving in the direction of improving the level of efficiency in government activities. The State House of Assembly has just passed a unanimous resolution, urging Hon Ifeanyi Ugwuanyi to dissolve all boards of parastatals, departments and agencies under the ministries in the state for their abysmal performance in monitoring, evaluating and policy formulation of the departments and agencies under their supervision. This happened just as the house approved the loan request by the executive.
Nigerians need to be convinced about improvements in the level of efficiency in the federal civil service before government goes ahead to pile up new stock of foreign debts. Dept service is now approaching N1.0 trillion annually and every caution is needed in ensuring judicious and beneficial use of every kobo of borrowed money.
A good starting point is to fish out all those involved in the recent budget padding saga that delayed the approval process and throw them off the system. If they know how to pad the budget; they also know how to get the funds out from the system. If not, the best intentions of the President notwithstanding, the system will frustrate him.
Federal and state governments should look inwards to clean up the internal systems of resource flow, blocking the black holes into which huge development capital of the nation have disappeared. The finance minister seems to be preoccupied or is it over excited about the low interest rate of the external loan in view. What she considers the cheapest rate will have a meaning as long as government is able to defend the exchange rate from the time of borrowing to the time of repayment.
More than low interest rate, the minister needs to urgently overhaul the system of funds flow from points of disbursement to the spending units. We need to have a system which ensures that funds put into it get to the targeted destinations to do the work for which they are budgeted more than we need to put new money into the system.
Stimulating the economy through government spending is not a question of how much money is thrown into the system but how much work it gets the money to accomplish on the production-consumption chain.
Asogwa, a public affairs commentator writes from Abuja
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